GENM (4715) - Genting Malaysia: A Case of Buying at The Bottom (Boostmy)
Genting Malaysia: A Case of Buying at The Bottom
1. Background.
The media, analysts and shareholders are up in arms over Genting
Malaysia’s 49%-stake purchase of Empire Resorts Inc for USD180m, which
chiefly owns and operates the Resorts World Catskills integrated casino.
This has caused the share price to take a 10% hit.
2. RPT the major concern.
Despite being a related party transaction (RPT), the deal can proceed
without minority shareholders’ approval. While technically allowed, as
conditions for an EGM are skirted, the move leaves a bad taste to
minorities who have no voice in deciding on a “material” acquisition. By
and large, the counterparty for the stake is none other than the
controlling shareholders, whom investors fear are bailing out a
loss-making company, whilst cashing out through reducing their direct
stake. This, I believe could be seen 2-ways, depending on the future
performance of Empire Resorts – if it turns out to be profitable with
decent ROE’s, then the controlling shareholders should be commended for
sharing some of this upside with minorities. However, if it turns out to
be a bust, then, by all means, investors should grab their pitchforks
and storm the next AGM.
3. Still in gestation. Aside
from that major concern, the company looks to me as a potential
turnaround story or an early-stage growth company. The main asset,
Resorts World Catskills was only completed in February 2018, and is only
in its second year of operations. New attractions such as an indoor
water park was recently opened and a golf course will be added in
2019/2020. A new poker room was only launched days ago, and sports
betting only commenced in July 2019. This indicates that there could be
upside to the business.
4. GGR on an uptrend.
While the property is loss-making, GGR trends are encouraging. Total
monthly GGR hit USD20m for the first time in June 2019, representing a
54% growth versus June 2018 (graphs 1 and 2). For the second quarter of
2019 (graph 3), total GGR breached the USD50m for the first time, an
increase of 45% yoy and 14% qoq. Meanwhile, this does not take into
account revenues from other sources such as racing, F&B and hotel
rooms which formed 22.6% of revenue according to its latest 10-Q filing.
The link to the data is provided below.
5. Fears of Empire Resorts dragging down earnings could be overstated.
It would, in my view, be lazy to assume a similar loss reported in
FY18, and apply it to FY20 forecasts. First, the casino only opened in
February 2018, hence it is not a full year contribution. Second, GGR for
1H19 already forms 81.6% of FY18’s total GGR. If annualised assuming no
sequential growth in 3Q and 4Q19, FY19’s GGR is set to increase 63%
yoy. This does not take into account the company’s growth potential in
FY20, which will be a full year contributor to GENM. Third, sports
betting which commenced in July 2019 has yet to be reflected in numbers
-- and sports betting is a significant business. Fourth, lower costs
from synergies have not been factored in.
6. Getting in on the ground floor.
Seen positively, the acquisition could allow investors an early ride on
a fairly new asset with growth/upside potential. While some might balk
at the USD180m price tag (for 49%), which may look steep at 1.89x book
value, they forget that Empire Resorts Inc is a listed company. And
privatisation exercises of listed companies, especially in the US, are
typically transacted at a premium to its last-closing share price. In
this case, however, the premium was only negligible. In fact, the deal
can be considered attractive as most negatives are reflected in its
share price. In effect, investors could be buying at the low (would you
rather pay high premiums for mature assets, or pay a reasonable price
for a growth asset?). In addition, the cost of investment for Resorts
World Catskills was quoted at USD1.2bn. Valuing 100% of Empire Resorts
Inc at USD360m could be a steal.
7. Closing remarks. While
the deal might not appear positive, especially in the near-term, I
don’t believe it is that destructive to Genting Malaysia’s value to the
tune of 10% or RM3.15bn. Most of the risks associated with starting a
new casino such as obtaining approvals/licensing, delays in
construction, cost-overrunes and even first year which bears higher
start-up cost have already been lifted (yes, the major shareholders have
already borne those risks). If any, investors gain entry to a vehicle
with mostly upside potential.
Source:
https://klse.i3investor.com/blogs/boostmy/218521.jsp
